Dow drops 353 points on fears over interest rates, China

Michael Iozzi, left, on June 10 worked with fellow traders on the floor of the New York Stock Exchange.

NEW YORK >> For investors, there was no place to go today.

A day after the Federal Reserve roiled Wall Street when it said it could reduce its aggressive economic stimulus program later this year, financial markets around the world plunged. A slowdown in Chinese manufacturing and reports of a squeeze in the world’s second-biggest economy heightened worries.

The global sell-off began in Asia and quickly spread to Europe and then the U.S., where the Dow Jones industrial average fell 353 points, wiping out six weeks of gains.

But the damage wasn’t just in stocks. Bond prices fell, and the yield on the benchmark 10-year Treasury note rose to 2.42 percent, its highest level since August 2011, although still low by historical standards. Oil and gold also slid.

“People are worried about higher interest rates,” said Robert Pavlik, chief market strategist at Banyan Partners. “Higher rates have the ability to cut across all sectors of the economy.”

The question now is whether the markets’ moves today were an overreaction or a sign of more volatility to come. What is becoming clearer is that traders and investors are looking for a new equilibrium after a period of ultra-low rates, due to the Fed’s bond-buying, which helped spawn one of the great bull markets of all time.

It doesn’t mean the stock run-up is over. After all, the S&P 500 is still up 11.4 percent for the year and 135 percent since a recession low in March 2009. But it may suggest the start of a new phase in which the fortunes of the stock market are tied more closely to the fundamentals of the economy.

And that might not be a bad thing. The reason the Fed is pulling back on the bond-buying is because its forecast for the economy is getting brighter.

The job market is improving, corporations are making record profits and the housing market is recovering.

“People are overreacting a little bit,” said Gene Goldman, head of research at Cetera Financial Group. “It goes back to the fundamentals, the economy is improving.”

The Dow’s drop today — which knocked the average down 2.3 percent to 14,758.32 — was its biggest since November 2011. It comes just three weeks after the blue-chip index reached an all-time high of 15,409. The index has lost 560 points in the past two days, wiping out its gains from May and June

The Standard & Poor’s 500 lost 40.74 points, or 2.5 percent, to 1,588.19. It also reached a record high last month, peaking at 1,669. The Nasdaq composite fell 78.57 points, or 2.3 percent, to 3,364.63.

Small-company stocks fell more than the rest of the market today, a sign that investors are aggressively reducing risk. The Russell 2000 index, which includes such stocks, slumped 25.98 points, or 2.6 percent, to 960.52. The index closed at a record high of 999.99 points Tuesday.

The yield on the 10-year Treasury note rose to 2.42 percent, from 2.35 percent Wednesday. The yield, which rises as the price of the note falls, surged 0.16 percentage point Wednesday after the Fed’s comments. As recently as May 3, it was 1.63 percent.

A Fed policy statement and comments from Chairman Ben Bernanke started the selling in stocks and bonds Wednesday.

Bernanke said that the Fed expects to scale back its massive bond-buying program later this year and end it entirely by mid-2014 if the economy continues to improve.

The bank has been buying $85 billion a month in Treasury and mortgage bonds, a program that has made borrowing cheap for consumers and business. It has also helped boost the stock market.

Alec Young, a global equity strategist at S&P Capital IQ, said investors weren’t expecting Bernanke to say the program could end so quickly, and are adjusting their portfolios in anticipation of higher U.S. interest rates.

“What we’re seeing is a pretty significant sea-change in investor strategy,” Young said

For much of the year, the stock market rose with barely an interruption. The S&P 500 climbed for seven months straight from November 2012 through May. Investors, fearful of missing out on the rally, pounced on any dips and pushed markets to record highs. Today, those opportunistic buyers were absent. Nobody wanted to stand in the way of the market’s slide.

As investors sold stocks, they likely put the proceeds in cash “for fear the deterioration will continue,” said Quincy Krosby, a market strategist at Prudential Financial.

The sharp increase in bond yields prompted investors to sell homebuilders, whose business could be hurt if the pace of home buying slows down. Those stocks fell today even though the National Association of Realtors said U.S. sales of previously occupied homes last month topped 5 million at an annual rate for the first time in more than 3 years.

Markets were also unnerved after manufacturing in China slowed at a faster pace this month as demand weakened. That added to concerns about growth in the world’s second-largest economy. A monthly purchasing managers index from HSBC fell to a nine-month low of 48.3 in June. Numbers below 50 indicate a contraction.

A big jump in the overnight lending rate in China also unsettled investors, said Brad Reynolds, a financial advisor at LJPR. The rate measures how much banks charge each other to borrow short-term money. The People’s Bank of China was forced to pump about 50 billion yuan, about $8 billion, into the Chinese financial system to alleviate the squeeze, Bloomberg News reported.

Before trading began today on Wall Street, Japan’s Nikkei index lost 1.7 percent. The FTSE 100 index of leading British shares fell 3 percent while Germany’s DAX dropped 3.3 percent.

In currency trading, the dollar rose to 97.34 Japanese yen from 96.54 yen. The euro fell against the dollar, to $1.3197 from $1.3274.

Gold plunged, leading a rout in commodity prices. Gold dropped $87.80, or 6.4 percent, to $1,286.20 an ounce. Silver fell $1.80, or 8.3 percent, to $19.823 an ounce. Both are at their lowest since September 2010.

Traders dumped gold and silver as their appeal as insurance against inflation and a weak dollar faded. Both became less of an issue after the Fed said it was contemplating an end to its bond-buying program.

Oil was swept up in the sell-off. Crude oil had its biggest one-day price drop since November. U.S. benchmark oil for July delivery sank $2.84, or 2.9 percent, to finish at $95.40 a barrel in New York. Gasoline futures fell more than 3 percent.

Some investors said the sell-off in stocks may be overdone. The Fed is considering easing back on its stimulus because the economy is improving. The central bank has upgraded its outlook for unemployment and economic growth.

The S&P 500 is still up 11.3 percent, for the year, not far from its full-year increase of 13.4 percent last year.

Among other stocks making big moves:

>> GameStop, a video game store chain that sells new and used games, rose $2.41, or 6.3 percent, to $40.94 after Microsoft backpedaled and said that there will be no limitations on sharing games on its upcoming Xbox One gaming console.

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HawaiiBloggerwrote:

What a bunch of B.S. !!!! It is just a bunch of stock brokers making a market...you just watch an see....the market will spring back and the brokers that advised its clients to sell....will advise its clients to buy.....making a market....that's all it is.....

on June 20,2013 | 11:29AM

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Anonymouswrote:

part of the o bama plan

on June 20,2013 | 03:01PM

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RichardCorywrote:

Well, it's pretty much a given that prices will go back up eventually. Who has the most stake in the stock market? It's the wealthiest 1%. The same people who have the power and influence to sway our political system. Are they really going to just let all of their wealth evaporate when they can just work their gamesmanship and pull a profit instead? Low stock prices just means it's time to buy at a discount, because that's very well what the rich are doing to get richer.

on June 20,2013 | 03:27PM

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Hapa_Haole_Boywrote:

That's what happens when the Fed takes away the kool-aid....

on June 20,2013 | 11:53AM

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Rochesterdj1wrote:

HawaiiBlogger - you're right on. We are a bunch of manipulated fools when it concerns "investing" in the stock market(s).
People ask yourselves, when the stock market sells off, who are the buyers? The answer - the same "institutions" that will resell the stock, they bought from you at an undervalued price, right back to the same "investors" who were advised to sell in the first place. What a SCAM.
But it's our fault for being the sheep that we are. We have noone to blame but ourselves. But what a shame that we are such a stupid bunch of people.
Remember strong citizens make a strong country, not the other way around.
DJ

on June 20,2013 | 11:53AM

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Rochesterdj1wrote:

....and we hear shouting that we want the government to stay out of private business yet when the government announces they are getting out of private business, the financial markets crash. Which is it folks - you can't have your poi and eat it too! Tiime for the revolution!

on June 20,2013 | 12:28PM

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HD36wrote:

You'll do ok if you keep cash for the next 6 months or short the long end of Treasuries if the 30 yr pulls back to 3.25. If it breaks above 3.5 its heading toards 4.5 very fast.

on June 20,2013 | 01:40PM

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frontmanwrote:

The Obama made recovery is hitting the wall............................ Hope and Change, don't you love it???

on June 20,2013 | 02:06PM

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iwanaknowwrote:

Six months from now this shock and doom will all be history.

on June 20,2013 | 03:49PM

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whoispangwrote:

wait a little then buy,buy,buy. I'm just a regular joe not the 1 percent and i do pretty good trading. Where else can you buy something and sell it instantly. Just stick to the blue chips and you cant go wrong. Just hope youall bought netflix at 50 a random pick for me.